MegaFon to Buy Scartel for $1.18 Billion as Earnings Rise

OAO MegaFon, Russia’s second-largest wireless carrier, said it plans to buy smaller mobile operator Scartel from owners including billionaire Alisher Usmanov for $1.18 billion and reported higher second-quarter earnings.

MegaFon also assumes about $600 million of debt as part of the deal, aimed to boost its data services, according to a statement from the Moscow-based company today. Operating income before depreciation and amortization rose 22 percent to 34.3 billion rubles ($1 billion), beating analysts’ estimates.

Buying Scartel from MegaFon’s controlling shareholder Usmanov gives the carrier a faster, so-called fourth-generation network and an edge against larger rival OAO Mobile TeleSystems and competitors such as VimpelCom Ltd. MegaFon already leads in mobile data revenue in Russia as consumers increasingly browse the Web on their mobile phones, according to AC&M Consulting.

“In terms of strategy, the Scartel acquisition is fully justified as it strengthens MegaFon’s position,” said Anna Kurbatova, an analyst at BCS Financial Group in Moscow. “However, it’s yet hard to say if MegaFon is overpaying or not as the company didn’t disclose any financial information.”

The purchase needs an approval from MegaFon shareholders at a Sept. 12 meeting. Sweden’s TeliaSonera AB, which holds a 25 percent stake in MegaFon, said it supports the deal.

MegaFon rose 4.7 percent to $32.45 at 8:29 a.m. in London. The company is seeking to sustain growth after boosting its share price more than 50 percent since a November initial public offering.

Usmanov’s Shuffle

The deal marks an internal shuffle of assets by Usmanov, whose USM Holdings Ltd. controls just more than 50 percent of MegaFon and about 82 percent of closely held Scartel. He is seeking an advantage over fellow billionaires Mikhail Fridman, who controls VimpelCom, and Vladimir Evtushenkov, who controls MTS.

Usmanov bought Moscow-based Scartel, which operates under the Yota brand, in a deal that valued it at $1 billion last year, the Vedomosti newspaper reported at the time.

MegaFon will pay $590 million, plus an interest of 6 percent, one year from the closing of the deal and the rest a year later. MegaFon plans to refinance the assumed debt as it is able to borrow at a lower rate than Scartel, Chief Financial Officer Gevork Vermishyan said on a conference call.

The deal shouldn’t hurt MegaFon’s ability to pay dividends, Chief Executive Officer Ivan Tavrin said on the call.

Faster Network

Scartel’s 4G network covers about 27 percent of the Russian population and it provides services to more than 600,000 subscribers. MegaFon had 66 million active subscribers at the end of the second quarter, an increase of 3.8 percent from a year earlier. MegaFon already offers LTE service on Scartel’s network through a partnership.

MegaFon’s Oibda margin expanded to 47.5 percent from 42.2 percent a year earlier as the company increased revenue and traffic by selling more affordable smartphones. Analysts had projected Oibda of 32.4 billion rubles, the average of estimates compiled by Bloomberg.

Net income expanded about eight-fold to 13.6 billion rubles, MegaFon said. Sales rose 8.4 percent to 72.2 billion rubles.

The company reiterated its full-year forecasts.

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